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14 Dec 2023

Corporate due diligence on sustainability: Council and Parliament reach agreement to protect the environment and human rights

Corporate due diligence on sustainability: Council and Parliament reach agreement to protect the environment and human rights

The Council and the European Parliament today reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). The aim of the Directive is to protect the environment and human rights in the EU and worldwide. The Due Diligence Directive will set out rules on the obligations of large companies with regard to actual and potential adverse impacts on human rights and the environment in respect of their own activities and those of their subsidiaries and the activities carried out by their business partners.

Companies have a duty

The Corporate Due Diligence Directive regulates the obligations of large companies with regard to the actual and potential impact of their activities on the environment and human rights. This due diligence covers the entire chain of its activities and concerns the company's upstream business partners and, in some cases, downstream activities such as distribution or recycling.

The Directive also lays down rules on penalties and civil liability in the event of infringements. Companies must put in place a plan to ensure that their business model and strategy are compatible with the Paris Agreement on climate change.

Main aspects of the agreement

Today's provisional agreement between the co-legislators defines the scope of the Directive, clarifies the liability for companies that do not comply with the rules and adds to the list of rights and prohibitions for companies. It also clarifies the various sanctions.

Scope of the Directive

The agreement defines the scope of the Directive so that it applies to large companies with more than 500 employees and a worldwide net turnover of more than €150 million. Non-EU companies will be affected if they have a net turnover of more than €150 million in the EU three years after the entry into force of the Directive. The Commission's task will be to publish a list of non-EU companies falling within the scope of the Directive.

The Financial Sector

Under today's agreement, financial services will be temporarily excluded from the scope of the Directive, but there will be a review clause for possible future involvement of the downstream financial sector on the basis of a sufficient impact assessment.

Climate Change and Civil Liability

Today's compromise strengthens the provisions on the obligation of large companies to do everything in their power to draw up and implement a plan to mitigate the consequences of climate change.

In the area of civil liability, data subjects' access to justice will be strengthened. A period of five years is set for the assertion of claims by those affected by negative impacts (including trade unions or civil society organisations). It also sets limits on the disclosure of evidence, injunctive measures and the costs of proceedings for the applicants.

As a last resort, companies that find that their business partners' business practices have a negative impact on the environment or human rights must terminate those business relationships if they fail to remedy the situation.

Sanctions

Several injunctions are foreseen for companies that fail to pay fines for breaches of the Directive. If fines are imposed, the company's turnover is taken into account (i.e. a minimum maximum of 5% of the company's net turnover). One of the measures of the due diligence process is for companies to fully involve the relevant stakeholders, including through dialogue and consultation.

Public procurement

The agreement stipulates that compliance with the Directive could be used as a criterion for the award of public contracts and concessions.

Definitions

The provisional agreement clarifies the obligations of companies described in Annex I – a list of specific rights and prohibitions that are considered to have a negative impact on human rights if they are not respected or violated. The list refers to international agreements that have been ratified by all Member States and which set sufficiently clear standards that can be met by companies.

The compromise adds new elements to the commitments and instruments set out in the Annex in relation to human rights, in particular for vulnerable groups. Delegated acts may also add core conventions of the International Labour Organisation (ILO) to the list once they have been ratified by all Member States.

In addition, the provisional agreement included references to other United Nations conventions in the annex, such as the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights and the Convention on the Rights of the Child. At the same time, it clarifies the type of environmental impact covered by this Directive, namely any measurable environmental damage such as harmful soil change, water or air pollution, harmful emissions, excessive water consumption or other effects on natural resources.

Next steps

The provisional agreement reached by the Council and the European Parliament still needs to be approved and formally adopted by both sides.

Background

On 23 February 2022, the Commission submitted to the European Parliament and the Council a proposal for a Council Directive on corporate due diligence with regard to sustainability. On 1 December 2022, the Council adopted its general approach.

 

Article sent by our 2024 partner, AICE

Source: Corporate sustainability due diligence: Council and Parliament reach agreement to protect the environment and human rights - Consilium (europa.eu)

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